RBA raises cash rate by 25 bps to 0.35%

RBA

  • Also increased interest rate on Exchange Settlement balances from 0% to 0.25%
  • Now was the right time to begin withdrawing stimulus
  • Outlook for economic growth remains positive
  • Inflation has picked up significantly and by more than expected
  • A further rise in inflation is expected in the near-term
  • But as supply-side disruptions are resolved, inflation is expected to decline back towards the target range of 2% to 3%
  • RBA committed to doing what is necessary to ensure that inflation returns to target over time
  • This will require a further lift in interest rates over the period ahead
  • To closely monitor future developments to determine the timing and extent of future rate hikes
  • full statement

This is like a bit of a Goldilocks decision by the RBA as they do give out a more hawkish undertone by hiking by 25 bps, instead of the 15 bps as expected. A 40 bps rate hike might have been the more aggressive approach but they are seemingly taking a more modest touch with this, and to be fair it is one that will not spook markets too much.

That said, the central bank does see inflation

inflation

Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods. In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.

Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods. In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
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hitting 6% this year. Besides that, it is interesting to note that the RBA says that it does not intend to sell the government bonds purchased during the pandemic.

All in all, it’s a cheeky move by the RBA to go with 25 bps as market expectations were either “go big or go home”.

They also played it coy on the timing and extent of future rate hikes but given their inflation outlook, one can expect more consistent rate hikes to follow in the meetings to come.

The aussie has benefited from the decision, with AUD/USD rising up from 0.7090 to 0.7140.

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